Too Much Paid Time off: Is It Time to Rethink Your Paid Time off Program?

It is a question organizations are pondering as financial liabilities grow because employees are not utilizing their bank of paid time off. According to a study in Inc. Magazine and Replicon (a time management organization), while 96% of Americans recognize the value of taking time off, about 40% do not take advantage of this benefit. The reasons are many: fear of returning to a mountain of work, fear of being seen as replaceable, wanting to show job dedication, a company culture that discourages vacation, inability to disconnect, and stockpiling. If you add COVID travel restrictions, a vast increase of work at home arrangements, and at least in Colorado, a 2021 requirement to provide sick time to employees, the overall result has CFO’s clamoring for options.

At the same time, both employers and state/federal legislators are considering adding more paid time off to the mix. According to a SHRM and Oxford Economics report, “More states are mandating paid leave in 2020 than did in 2019. As of the end of 2019, California, New Jersey, New York, and Rhode Island required companies to offer paid-leave benefits to eligible employees or to participate in an equivalent partial-wage-replacement program. By early 2020, mandated paid leave had spread elsewhere, such as Nevada, Washington and Washington, D.C.”. It appears mandated is on the rise.

Two major models

There are two main options for providing paid time off to employees: a paid time off (PTO) bank that combines vacation and sick time, and traditional plans that separate the two. Traditional paid leave plans maintain a strong presence in the workplace, as 49% of employers responding to XpertHR’s 2020 Employee Benefits Survey noted they have this type of plan, compared with 44% who offer a paid time off (PTO) plan (where all or most leave is in a single PTO bank). According to the current Employers Council Paid Time Off survey; Colorado it is 55% (traditional) to 45% (PTO), Arizona 48% (traditional) 52% (PTO), Wyoming 62% (traditional) 38% (PTO) and Utah 42% (traditional) 58% (PTO). Unlimited paid time off plans account for about 8% of the programs across all geographies.

There are pros and cons to each of these programs. All things considered, a look at a move to a traditional plan is worthy of some thought. Why?

Points to ponder

First, state laws. Effective January 1, 2021, all employers with 16 or more employees in Colorado must provide each one with one hour of paid sick leave for every 30 hours worked, up to 48 hours per year under the Healthy Families and Workplaces Act (HFWA). You might be thinking, no problem, our sick leave is more generous than that. Or you might be thinking we need to increase our number of days. In either case, an employee must be allowed to use their paid sick leave as it accrues. Therefore, a paid leave policy that requires an employee to wait a certain period before being allowed to take leave would not be compliant with the HFWA. Additionally,  employees must be allowed to roll over year to year up to 48 hours of unused paid sick leave, but an employer can restrict an employee from using more than 48 hours of paid sick leave in a year. The qualifying reasons for taking leave are broad and consist of personal and family care situations.

In Arizona, the Fair Wages and Healthy Families Act requires employers to provide all employees at least 40 hours of paid sick time per year to care for themselves or a family member (24 hours if the employer has fewer than 15 employees). An employer may choose to grant all employees 40 hours of paid sick leave (24 hours if the employer has fewer than 15 employees) upon hire, and at the beginning of each year thereafter or upon hire, all employees begin to accrue paid sick leave at the rate of at least one hour for every 30 hours worked. No employee will accrue or use more than 40 hours of paid sick leave (24 hours if the employer has fewer than 15 employees) each year unless the employer selects a higher limit.

Second, depending on the state, use-or-lose it rules and payouts upon termination are key elements to your analysis. Also, when transitioning to a combined plan, many organizations simply add sick and vacation time together. The result (depending on the state) might be an increase in total liability.

Regardless of how you design your paid time off plan, think about how you might reduce the overall liability balance. Here are a few thoughts, but be ready as each comes with its own consequences.

  • Capping time accrual is step one.
  • Requiring employees to use time in a specific timeframe is legal but awkward. For example, use “x”  time by the end of 2020.
  • Paying out all employees “x” amount of time will reduce the balance but will reduce cash.
  • Closing for a week but allowing employees to use PTO to cover is allowable. But since not everyone has a high balance this could hurt those who do not have enough time to cover the period.

Third, no one wants to be sick. No one wants a family member to be sick. By contrast, you want employees to take vacation time to get a physical and mental break from work. Taking a break is a way to maintain the employee’s health. When you mix the two, in a sense, you are creating a paradox as you are mixing what you do not want (employees to be sick) with what you do want – healthy employees.

Who would have ever thought, not taking time off would be an issue? Perhaps it is time to assess your total rewards strategy and determine what elements are essential to your employee demographic. We can help you think through the process or provide the resources if you need a more hands-on approach. Give us a call.